8x8 2008 Annual Report Download - page 35

Due to the adoption of SFAS No. 123R, some exercises result in tax deductions in excess of previously recorded benefits based
on the option value at the time of grant, or windfalls. We recognize windfall tax benefits associated with the exercise of stock
options directly to stockholders’ equity only when realized. Accordingly, we are not recognizing deferred tax assets for net
operating loss carryforwards resulting from windfall tax benefits occurring from April 1, 2006 onward. A windfall tax benefit
occurs when the actual tax benefit realized by the company upon an employee’ s disposition of a share-based award exceeds the
deferred tax asset, if any, associated with the award that the company had recorded. We use the “with and without” approach as
described in Emerging Issues Task Force (“EITF”) Topic No. D-32, in determining the order in which our tax attributes are
utilized. The “with and without” approach results in the recognition of the windfall stock option tax benefits only after all
other tax attributes of ours have been considered in the annual tax accrual computation. Also, we have elected to ignore the
indirect tax effects of share-based compensation deductions in computing our research and development tax and as such, we
recognize the full effect of these deductions in the income statement in the period in which the taxable event occurs.
KEY BUSINESS METRICS
We periodically review certain key business metrics, within the context of the performance goals set by management, in order
to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our
business. The key business metrics include the following:
• Churn Average monthly subscriber line churn for a particular period is calculated by dividing the number of lines
that terminated during that period by the simple average number of lines during the period and dividing the result by
the number of months in the period. The simple average number of lines during the period is the number of lines on
the first day of the period, plus the number of lines on the last day of the period, divided by two however, for this
purpose we do not include terminations that occur within the first 30 days after purchasing our service. We use the
churn rate to evaluate whether we are retaining our existing subscribers in accordance with our plans. Churn
approximated 4.2% for fiscal 2008, 4.2% for fiscal 2007 and 3.0% for fiscal 2006. We believe that the increase in
churn from fiscal 2006 to fiscal 2007 was due to a strengthening in our collection policies and procedures in the first
fiscal quarter of 2007 combined with an increase in terminations of our residential service because of price increases
and competition. We believe that retaining and building upon our existing subscriber base is critical to our future
growth and business success. Therefore, significant increases in our churn rate would be likely to have an adverse
impact on our operating results and the value of our business.
• Subscriber acquisition cost Subscriber acquisition cost is defined as the sum of the advertising, marketing,
promotions, commissions, rebates and equipment subsidy costs associated with our efforts to acquire new subscribers.
We review this metric to evaluate how effective our marketing programs are in acquiring new subscribers on an
economical basis in the context of estimated subscriber lifetime value. We believe that our subscriber acquisition cost
decreased to $123 for fiscal 2008 from $126 for fiscal 2007 and $122 for fiscal 2006 because of customers that we
acquired when their previous VOIP providers exited the business. Acquiring those subscribers required limited
marketing and resulted in a reduced customer acquisition expense.
We believe it is useful to monitor these metrics together and not individually as it does not make business decisions based upon
any single metric.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated Financial Statements and related notes included
elsewhere in this Report.
REVENUES
2008 2007 2006
Service revenues $ 56,177 $ 45,046 $ 26,113 $ 11,131 24.7% $ 18,933 72.5%
Percentage of total revenues 91.1% 84.8% 81.9%
Year Ended March 31, Year-Over-Year Change
(dollar amounts in thousands)
2007 to 2008 2006 to 2007
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